Doug,
As everybody have said, its mainly about protecting from direct light which might hit the front element and create flare in the image.
however it goes deeper, ANY light which passes through a piece of glass, will to some degree scatter, we are not talking about a lot here.. but this scattered light reduces the darkness of the areas which should be black (it does also technically speaking affect the highlights, but since there already is so much light going on there, its not as noticible - compared to the shadow where only small amounts of light is hitting the image sensor.). The result is that the overall contrast of the image is reduced, meaning less "snap" or feeling of sharpness.
This is why commercial photographers are often seen using a large box style lens hood, both in the studio and outside on location.. they are trying to adjust it as close as possible to the edge of their image, so that only light which is part of their image will actually reach the lens. You will also notice these big lens shades on motion picture cameras and highend broadcast cameras.
Most of the people using them have in training done a couple of projects which involved doing the same image with and without deep shade on the lens... the result speak for them selves...
However, on a camera like the Pro1 we have a Tulip style lens shade. it is in no way as effective as a box style lens shade. as it does not significantly reduce the amount of light around the front lens element of the camera. Meaning, this tulip lens shade is mostly effective to cut flare from direct lightsources.
If you are in the mode. do a controlled test where you frame the lens with a black box to get nice and dark on the lens. then compare with a image taken with the lens exposed to the light in the room. You should be able to see a difference in the contrast. Outside or anywere with bright light is even better. (smile)
Just my 2 cents - your mileage may vary.
Bo
http://www.bophoto.com/panos 
